Aided by a so-called Goldilocks environment of strong growth without inflation, portfolios containing a healthy balance of stocks and bonds are enjoying their best bull market in more than 100 years, according to Goldman Sachs.

But don't get too excited yet — that has resulted in valuations across equities, bonds, and credit getting the most stretched since 1900, a development Goldman sees portending tough times ahead for investors.

"It has seldom been the case that equities, bonds and credit have been similarly expensive at the same time, only in the Roaring 20s and the Golden 50s," a group of Goldman strategists led by Christian Mueller-Glissmann wrote in a client note. "While in the near term, growth might stay strong and valuations could pick up further, they should become a speed limit for returns."

Mueller-Glissmann and his colleagues do lay out what they see as the two most likely medium-term scenarios:

Scenario 1 ("slow pain")

Scenario 2 ("fast pain")

Goldman says Scenario 1 is a far more likely outcome than the bear market outlined in Scenario 2. But the mere fact that the firm is entertaining the idea of a major market downturn should be cause for investor concern.

"There will likely be a balancing act with slowing growth and rising inflation," Mueller-Glissmann wrote. "And at current low yield levels and with the 'beginning of the end of QE,' bonds might be less effective hedges for equities and are likely a larger drag on balanced portfolios."

Author:
pulse
Source:
BusinessInsider

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